Opening up internal trade could boost productivity

August 03, 2016

Last month, provincial and territorial premiers met in the Yukon for the Council of the Federation’s annual summer meeting. The future of health care funding and the possible imposition of a nationwide federal carbon tax were prominent topics. However, another key topic, and one that has been largely ignored over the past two decades, is internal trade between provinces and territories.

Although provinces do not face tariffs when trading with one another, there exist numerous “non-tariff” barriers to trade. These include restricted access to government procurement contracts, protected provincial monopolies, lack of skills recognition, and particular regulations and standards. For example, some provincial and territorial governments give an unfair advantage to local companies’ bids on procurement contracts and therefore taxpayers may not always be getting the best value-for-money. As another example, apprentices’ earned hours are not always fully transferable across provinces, creating restrictions on labour mobility. Inconsistencies across jurisdictions also create trade barriers that raise the cost of doing business, reduce business expansion, limit choice, and impact Canadian consumers and the economy.

The premiers agreed in principle on a new Canadian Free Trade Agreement

Since 1995, interprovincial trade has been regulated by the Agreement on Internal Trade. This Agreement covers only select parts of the Canadian economy. The new Canadian Free Trade Agreement (CFTA) is more comprehensive. It was created through a mechanism known as a “negative list” in which, by default, trade in all goods and services is deregulated and standards are harmonized. If a province wishes to protect a particular industry, it must make a case for an exception to the rule.

While provinces aren’t quite ready to give up their provincial monopolies on liquor sales, they did agree to establish a working group on alcoholic beverages to explore and evaluate future opportunities. As a side deal, British Columbia, Ontario, and Québec opened up access to each other’s beer and wine products. Products from each of the three provinces are now listed, at least virtually, on each government’s liquor control board websites, and are accessible through home or store delivery. However, each province still retains exclusive retailing rights, along with the lucrative profits, in their respective jurisdictions.

The new agreement is good for business

The CFTA is especially good news for small- and medium-sized businesses. Smaller firms have access to fewer resources and less expertise to help them scale-up across multiple jurisdictions with different regulatory environments. A more predictable business environment means that firms can spend less time on compliance and red tape, and focus on expanding. This will encourage firm growth, and competitive pressures should lead to productivity improvements.

Procurement issues need to be resolved

Perhaps the most contentious issue in the CFTA is the set of rules regarding government procurement. As many provinces—with help from the federal government—develop big infrastructure plans, firms want access to bid on projects in other provinces. According to Ontario’s Minister of Economic Development and Growth, the CFTA will level the playing field by opening up government procurement contracts to all provinces.

However, some provinces are keen on protecting procurement – they believe government spending should stay inside their province. This is truly a stumbling block. As billions of infrastructure dollars are spent across Canada, taxpayers will only get the best value-for-money if the bidding process is competitive. This is one potential area of significant gains from trade, but we must remain cautiously optimistic. The final agreement still requires further negotiation and must be presented to the federal government. As such, the specific details of the CFTA remain sealed.

Why internal trade, and why now?

Part of the impetus for getting a deal done is related to the country’s pursuance of international free trade agreements. The pending deal with the European Union, the Comprehensive Economic and Trade Agreement (CETA), would open up procurement to European contractors. Therefore it is imperative that all Canadian firms also have access to interprovincial bids.

The premiers are supportive of international free trade agreements. They encourage the federal government to bring CETA into force as soon as possible, maintain access to the US market, ratify the TPP, and pursue new opportunities in the Asia Pacific Region. Creating a seamless business environment with minimal interprovincial barriers will help Canada’s position in negotiating deals with other countries. A fragmented business environment makes for slow negotiations and is already bad for firm growth and expansion.